You can tell that the landscape is changing. Third Way has just released a memo titled Fixing “Foreclosure-gate” which details out a policy solution to the current foreclosure fraud crisis. That the post-Ibenez landscape is so drastically different that groups are mobilizing in a policy way should tell us that things may move in Congress, and we need to be ready.

There’s been some fantastic writing on the memo that I’ll point you to – Yves Smith, David Dayen, and Marcy Wheeler should all be read on this. Marcy’s quick summary is great: “The more I think about this paper, the more it seems like Third Way is saying, ‘Congress, we’ve had a major setback in the courts. Can you please make sure to 1) limit access to the courts and 2) preventing any more of these judgments that will reveal just how deep the shitpile really is?'”

Smith:

The big difference between the original and the new, improved version of the bailout model is that the payouts to the banks were at least in part visible the first time around. This is an effort yet again to spare the banks any pain, not only at the cost of the rule of law but also of investor rights….

Note that these provisions would also presumably have the effect of sheltering servicers and trustees from litigation, when the trustees made multiple certifications that they had all the loans and everything was in order. Remember, if the trustees had done what they repeatedly said in writing, in SEC filings, that they had done, none of this would be an issue.

Thus the Third Way plan also destroys contractual agreements without approval of the parties. Investors were entitled to get collateral with good title and, in the absence of that, to put back defective collateral to the seller. This would undo such contractual provisions for the sole benefit of one side, those on the originating/servicing end of the deal.

I don’t have much to contribute other than this. I really dislike arguments that TARP was successful because TARP made a profit, because the issue is a financial crisis, not a specific program. A financial crisis has three waves, a liquidity crisis, a solvency crisis, and a reform effort.

TARP stopped the liquidity crisis. Everything since Obama took office was about trying to deal with the solvency crisis, and the solvency crisis is directly linked to the infrastructure of servicing debt that exists within the Too Big To Fails banks alongside their junior mortgage debt exposure.

The first attempt to solve the solvency crisis was with a bailout through PPIP, but the subsidy wasn’t enough to get the MBS cleared. Then the appearance of a plan was through hoping that the economy would have recovered by now, that unemployment would be down, GDP up and housing stabilized and growing, clearing underwater mortgages. This too has failed – housing will likely fall 10% this year, foreclosures keep on churning and the servicing model is collapsing under its too-thin weight.

So by locking down on the ability for courts to vet out these issues, this is another attempted fix to the solvency crisis. The courts are needed to do their job. As Krugman has pointed out about Asia crisis and Stiglitz pointed out about Russia document problems and influence of the powerful to bully the courts create a perfect storm to bail out broken institutions in a crony way and not actually solve real problems during a crisis.

I’ll have more about what an alternative solution should look like, but this isn’t it. We need to remove servicing from loan modification process. That involves canceling the mess that is HAMP, creating a chapter M for bankruptcy, forced mediation before foreclosure, and an emphasis on principal writedowns. We need a serious investigation of the servicing industry, focused on criminal conduct and the software used. And we need to see if Dodd-Frank needs to be put into play for bank restructuring. That’s the price for fixing whatever the bank lobby wants done at the Federal level.

We know what we need to do in order to build out from this financial crisis and get the economy going again; it’s just a question of whether or not we’ll go for another bailout to paper over the losses.

12 Responses to Third Way Comments on Foreclosure Fraud Policy in the Post-Ibanez Landscape

There will be no economic recovery, we are in the early stages of full blown financial collapse ala 1930 at best, “weimer republic” at worst. The extend, pretend, bailout and print game can only occur in a low interest rate “free money” environment which is closing as I type. Once the Feb is forced to raise interest rates and the threat of an imminent currency crisis forces Congress to rein in it’s spending then the second part of the collapse will begin. Remember, Jamie Dimon predicts banking crisis every 5-7 years. How many more Wall Street bailouts can the country withstand before it implodes?
My money is on NONE.

“We know what we need to do in order to build out from this financial crisis and get the economy going again”

The implicit assertion in this sentence is a familiar one — namely, that if we had done a better job of dealing with the banks (that is, taking them into receivership or whatever), the economy would be doing better now. But what’s the evidence for it? Sweden is typically held up as the quintessential example of how to deal with a banking crisis. Yet its recession lasted three full years, and only grew 4.1% in its first year of recovery, even though it had advantages that the US economy doesn’t currently have (devaluation, and a booming global economy). Swedish GDP per capita didn’t return to its pre-recession highs until 1997, five years after the crisis erupted, while US GDP is already about where it was in 2007. The US economy is clearly growing well below capacity, and suffering from a lack of demand. But where’s the evidence that a failure to inflict losses on bank shareholders and creditors is the source of the problem?

Why should principal write-downs be emphasized? That is moral hazard right there. I agree with most everything else you say, but just like big companies need to be allowed to fail without a bailout, in an orderly fashion, mortgage debtors need to fail sometimes, too.

If a proper foreclosure occurs, the home can get marked to market, and a new family gets an affordable home and can build equity and participate in a sane market. The prior owners can rent at a rate they can afford, and rebuild their credit over a few years, and learn not to take such risks (which hurt us all).

If a principal write-down occurs, people are encouraged to take risks in the housing market, and the house is not marked to market – propping up prices.

It sounds like you’re expecting the prospective borrower to be the gatekeeper for bad loans. First of all, they have neither the information nor the expertise to be qualified for that position; but even more serious, they’re too numerous and diffuse. If anyone offers negative-amortization or otherwise toxic loans, *someone* is going to get suckered into taking them; fully educating every single potential borrower in how to spot a toxic loan may not even be possible, let alone possible for a reasonable cost.

Or to put it more simply: it may be irresponsible to take a loan you know you can’t repay, but how can it be irresponsible to take a loan that the lender knows (but conceals from you) that you can’t repay? Blaming the borrower ignores the realities of the situation.

Reform has to occur at the lender end because they’re more concentrated, and because they have the expertise to understand and apply standards of loan quality.

I was the victim of a predatory loan. I’ve been in the “under review” pile for three years at BofA now waiting for a modification to a reasonable loan. Yet I pay the mortgage every month and that is putting me in the poor house as I wait for Congress or someone to turn this mess around.

Yes, there are irresponsible borrowers. I am not one of them. And I’m not an idiot either. I knew what I was signing, but I was tricked into a neg am loan in a practice called “Hiding Paper.” I don’t expect any write down. All I need is a new fixed loan at a reasonable rate where I am paying some principle every month and I’ll be fine. But no one cares about me because I am current on my loan (for now anyway). I’m sure I’m not the only one in this situation.

If we just took care of the responsible home owners and punished the banks who gave them predatory loans, then I’m sure that a big part of this mess would sort itself out. But I’m not holding my breath.

My main take on this is How Do We Do This?
It’s clear to me that this is just another example of the growing power of “The Elite” in this country. That the mythology of America is growing ever more irrelevant to the reality of America. But those who do this sort of thing are in power and very powerful. They own the government for the most part. And the only current political movement with any force behind it is the Tea Party which is financed by big money and thinks the problem is big government, not big banks and corporations.
You say you want a revolution? Well for a standard take on what happens in a revolution look at Tunisia. We may not be as disfunctional as they are, but once violence starts nobody knows for sure where it will end, or who will end up on top.
So how do we make this happen? I wish I had an answer.

This post is a classic example of how even the smartest and best intentioned liberal economists are completely confused by the finance focus of conventional economics. TARP did two important things (1) stop a total panic and collapse and (2) save the auto companies and the UAW, but (2) is treated as a minor detail by people who obsess about the mortgage mess. The effects of the auto bailout and its synergy with the DOE investments in electric cars and advanced battery technology are long term more important than the failures of HAMP. Economies cannot rely on real-estate transactions – they need to produce high value goods. The Obama administration’s efforts to restart industrial production may fail, they may even be fundamentally flawed, but the basic problems of the US economy are not an accounting issue or the unwillingness of banks to lend money to their regular borrowers – much of the problem is that credit was grossly mis-allocated for decades. If you look at where credit was flowing and what credit was being used for over the last 20 years, you will see the creation of a lot of debt-fueled slash-and-burn consolidation that brought us housing bubbles, vast right wing radio networks, tons of stupid CRE providing over-priced locations for debt-fueled retailer chains, PE company pillage and so on. To pretend that this mess can be cured by mortgage cramdowns is perverse.